Cablegate: Beverage Industry Plans Collide with the Sugar Politics In

VZCZCXRO3362
OO RUEHDT RUEHPB
DE RUEHHM #0661/01 3240313
ZNR UUUUU ZZH
O P 200313Z NOV 09
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6133
INFO RUCPDOC/USDOC WASHDC PRIORITY 0153
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHHI/AMEMBASSY HANOI PRIORITY 4031
RUEHHM/AMCONSUL HO CHI MINH CITY PRIORITY 6376
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000661

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO
USDA/FAS/OTP/LBENNETT

E.O. 12958: N/A
TAGS: ECON EAGR EINV ETRD VM
SUBJECT: BEVERAGE INDUSTRY PLANS COLLIDE WITH THE SUGAR POLITICS IN
HCMC

HO CHI MIN 00000661 001.2 OF 002

1. (SBU) By protecting its sugar markets through high import
tariffs and limited import quotas, Vietnam has elevated sugar
prices but disrupted supply, according to HCMC's
foreign-invested beverage industry. These policies are
beginning to make it difficult for companies to expand their
investments or even plan current production. The general
manager (GM) of one major U.S.-based soft drinks manufacturer
asserts that sugar policy pits Vietnam's pro-farm Ministry of
Agriculture and Rural Development (MARD) against the
pro-industry Ministry of Industry and Trade (MOIT), though with
additional sugar imports recently authorized for three FDI
beverage/confectionary companies, the GM believes industry has
gained the upper hand. In this environment, his company is
looking to lobby the GVN on sugar policy and has decided to
invest another $200 million dollars over the next three year to
increase their bottling capacity in Vietnam. End summary.

Rising Prices Prompt Opportunism, Gouging and Smuggling
--------------------------------------------- ----------
2. (SBU) This year's steep increase in global sugar prices has
prompted Vietnamese sugar refiners to renege on supply
contracts, the GM said. Sugar prices have risen by better than
67 percent in 2009: world sugar prices are up from 344
USD/metric ton (bulk) in January to 583 USD/metric ton (bulk) in
October, and prices in Vietnam rose from 8,000 VND/kg ($457
USD/metric ton) in January to 15,000 VND/kg ($833 USD/metric
ton) through early November. Vietnam's prices are consistently
higher than the global market, mostly because of quantitative
import restrictions and import tariffs, but follow the global
trend, the GM said. Vietnam's sugar mills are mostly
state-owned, usually by the provincial governments, or
recently-equitized (converted into a joint-stock company by
selling a share of the company). As a result they are bloated
and inefficient, he continued, and they are able to carry on
business as usual only because of the country's 40 percent
tariff on in-quota sugar imports (the most-favored nation rate)
and a cost-prohibitive 100 percent tariff rate on out-of-quota
imports.

3. (SBU) This trade policy hurts everyone, the GM said, because
his company can't get enough high-quality domestic sugar and
doesn't have consistent access to imported sugar. Because
Vietnamese sugar refiners cannot meet peak demand, he said, not
only must MARD and MOIT license additional ad hoc sugar import
quotas but there is also a significant volume of sugar smuggled
from Thailand via Cambodia. His beverage company cannot hedge
its exposure to fluctuating sugar prices in Vietnam (by buying
sugar future contracts in foreign markets) because the company
cannot be certain it will be allowed to import the sugar, he
stated; instead the company is stuck buying on Vietnam's spot
market for sugar. Vietnam's sugar refiners concentrate on
low-quality sugar because profit margins are higher, but
confectionary and beverage manufacturers can't use it, the GM
said. Of Vietnam's 38 sugar mills, only 9 provide the high
level of quality (equivalent to table sugar) that his company
needs. Because the purchasing and pricing of raw materials is
not transparent, Vietnamese farmers sometimes hoard the sugar
crop hoping that prices will rise, he continued. According to
the GM, even a marginal increase in the efficiency of Vietnam's
sugar crushing and refining industry could turn the country from
net importer to exporter of sugar. As it is, overall sugar cane
acreage in Vietnam has dropped about one percent per year over
the last decade. Wild fluctuations in pricing mean that the
beverage company has decided to build a physical inventory of
sugar and pay for its storage. While none of these problems are
unique to Vietnam, the trend here worries the GM. Where the
company has budgeted $2 million for domestic sugar purchase in
2009, it plans for $5 million in 2010.

4. (SBU) In the latest round of sugar import quotas, his soft
drink company didn't get official word that their quota request
had been approved until two weeks after stories in the media
claimed his company, along with Nestle and Vinamilk had been
granted quota. To their credit, the GVN did give the company
enough lead-time to manage the imports it approved, with four
week's advanced notice before the start of a four-week window of
opportunity to import their approved quota.

Industry Looks to Lobby, but Not Sure Where to Start
--------------------------------------------- -------
5. (SBU) The GM said his company would like to engage the GVN on
its sugar policy, but isn't yet sure where to start. The
Ministry of Industry and Trade (MOIT) approves sugar import

HO CHI MIN 00000661 002.2 OF 002

licenses, he said, but needs Ministry of Agriculture and Rural
Development (MARD) concurrence. MoIT's constituency is
industrial, so the ministry argues that Vietnam is short of
sugar and needs to license more sugar imports. On the other
hand, MARD represents agricultural interests and argues that
there is no sugar shortage and no need to increase imports,
which would certainly drive down the domestic prices of sugar to
something closer to the world commodity price for sugar. In
recent weeks HCMC newspapers have carried conflicting and often
contradictory articles on sugar availability and pricing.

6. (SBU) The beverage company has turned to Brooks and Bowers,
an American consulting firm, to develop a strategy on how best
to lobby the GVN for the right to import sugar regularly.
Should the company lobby the GVN as a company, as the
foreign-invested beverage industry, or through a broader
industrial coalition? Sugar supply has become a bottleneck for
the company, delaying planned expansion.

Prospects for Growth Remain Good; Really Good
---------------------------------------------
7. (SBU) That's too bad, the GM concluded, because his company
plans to invest $200 million dollars in Vietnam over the next
three years, including $90 million in capital expenditures to
expand manufacturing and bottling in Ho Chi Minh City and
Danang, as well as Hanoi. Company sales volumes increased 20
percent in 2008 despite 28 percent inflation in Vietnam and will
again grow by 20 percent in 2009 despite the effects of the
global economic slowdown, he continued. The average Vietnamese
person drinks 11 bottles of carbonated soft drinks per year,
just a fraction of the 50 bottles per year in Nigeria or a
rounding error in the 600 bottles per year consumed in Mexico.
Paired with favorable demographics -- 60 percent of Vietnam's
population is under age 35 -- the relatively untapped Vietnam
market makes its one of the three most attractive markets in the
world (along with India and China) to beverage companies, he
said.

Comment:
--------
7. (SBU) The soft drink industry's sugar difficulties are a
great example of internal politics at work in Vietnam as the
country struggles to implement WTO reforms. Since the sugar
refineries often have strong political ties at the provincial
level, both MARD and MOIT come under considerable political
pressure to create favorable conditions for domestic sugar. End
comment.

8. (U) This cable was coordinated with Embassy Hanoi.
FAIRFAX

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